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Chapter 3: Liberalisation, Privatisation & Globalisation – An Appraisal

Q.1 Define Economic Reforms
Ans. Economic reforms refer to a set of Economic Policies directed to achieve
improvement in Economic efficiency
Q.2 Explain any four reasons for Economic reforms.
Ans. The four reasons of Economic reforms are:
1) Poor performance of Public Sector: Between 1951 to 1990, Public sector was
assigned an important role to work for the Economic development of India.
However, except for a few public enterprises, the overall performance was
very disappointing. As a result, they faced huge financial losses and the
Government had to make necessary economic reforms.
2) Deficit in Balance of Payment: Deficit in Balance of Payment (BOP) arises
when foreign payments from imports exceed foreign receipts from exports.
Even after imposing heavy tariffs and fixing quotas, there was a sharp rise in
imports. On the other hand, there was a slow growth of exports due to low
quality and high prices of Indian goods in the international market. As a result,
government was getting into a debt trap.
3) Fall in Foreign Exchange Reserves: In 1990-91, India’s Foreign Exchange
Reserves fell to such a low level that there were not enough reserves –
a. To finance imports for more than 2 weeks, and
b. To pay the interest that needs to be paid to international lenders
The situation became as grave as to force the government to mortgage
the country’s gold reserves to discharge its foreign debt.
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4) Inefficient Management: The origin of the financial crisis can be traced from
the inefficient management of the Indian economy, as listed below:
1) the Government was not able to generate sufficient revenue from internal
sources such as taxation, profit from public sector enterprises, etc.
2) Government expenditure began to exceed its revenue collection
3) Maximum international financial funds was spent on meeting
consumption needs.
Q.3 What is New Economic Policy? What are its main measures?
Ans. The New Economic Policy (NEP) was announced in July, 1991. It is also known
as economic reforms. The main aim of the policy was to create more competent
environment in the economy and to remove the trade barriers to entry and growth of
firms.
There are two measures under NEP:
1) Stabilisation measures: They refer to short term measures which aim at:
a. Correcting weakness of balance of payment by maintaining sufficient foreign
exchange reserves
b. Controlling inflation
2) Structural Reform measures: They refer to long term measures which aim at:
a. Improving the efficiency of the economy
b. Increasing international competitiveness

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Q.4 What are the main policies of NEP?

Ans. The New Economic Policy (NEP) consisted of policies under main three heads:

MAIN POLICIES OF NEW

ECONOMIC POLICY

LIBERALISATION PRIVATISATION GLOBALISATION

(Refers to removal of (Refers to transfer of (Refers to integrating
Entry and Growth ownership, the National Economy
restrictions on the management and with World Economy)
Private Sector) control of Public Sector
to Private Sector)

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LIBERALISATION
Q.5 Explain Liberalisation, its purpose and the other important reforms taken by the
government under this head.
Ans. Liberalisation of the economy means its freedom from direct or physical controls
imposed by the government. Before 1991, government had imposed several controls
on private enterprises in the domestic economy. These included Industrial Licensing
System. Price Control or Financial Control on Goods, Import Licence, Foreign
Exchange Control, Restrictions on investment by big business houses, etc.
Purpose of Liberalisation:
Encouraging Private sector and Multi-national corporations (MNCs) to invest and
expand in Indian economy.
To introduce much more competition in to the economy by increasing the efficiency
The economic reforms taken by the government under liberalisation include the
following:
i. Industrial Sector reforms
ii. Financial Sector reforms
iii. Tax reforms
iv. Foreign Exchange reforms
v. Trade and Investment Policy reforms
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Q.6 Explain Industrial Sector reforms.

Ans. The Government introduced its New Economic Policy on July 24, 1991. The
various measures under industrial policy reforms include (refer diagram below):

Monopolies and
Restrictive Trade
Policies (MRTP)Act

De-
Reduction in INDUSTRIAL reservation
Industrial SECTOR under Small-
Licensing REFORMS Scale
Industries

Decrease in role of
Public Sector

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i. Reduction in Industrial Licensing: The new policy abolished the requirement of

licensing except the following five industries:
a. Liquor
b. Cigarette
c. Defence Equipment
d. Industrial explosives
e. Dangerous chemicals
Thus, no licenses were required to set up new units or expand existing ones
ii. Decrease in the role of Public Sector: Under the New Industrial Policy, number of
industries reserved for Public sector was reduced from 17 to only 8; in 2010-11,
the number of these industries was further reduced to merely 3 as follows:
a. Defence Equipment
b. Atomic Energy generation
c. Railway transport
iii. De-reservation under Small-Scale Industries: Many goods produced by small-
scale industries have now been de-reserved.
Now, investors for small undertakings can invest up to ₹1 crore on Plant &
Machineries.
The market was allowed to determine the prices and not by the government.
iv. Monopolies and Restrictive Trade Practices (MRTP) Act: With the introduction of
liberalisation and expansion scheme, the requirement for large companies to
seek government approval to establish or expand was eliminated.
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Q.7 Explain Financial Sector reforms.

Ans. Financial sector includes (a) Banking and non-banking Financial Institutions, (b)
Stock Exchange Market and (c) Foreign Exchange Market.
In India, financial sector is regulated and controlled by the RBI.
The reform introduced under financial sector are:
i. Change in role of RBI: The role of RBI was reduced from Regulator to Facilitator
of the financial sector. As a result, financial sector was allowed to take decisions
on many matters without consulting RBI.
ii. Origin of Private banks: Under financial sector reforms, new private sector banks,
both Indian (e.g. HDFC and ICICI) and Foreign banks (e.g. HSBC and American
Express) came into existence.
iii. Increase in limit of foreign investment: The limit of foreign investment was raised
to around 51%. Foreign Institutional Investors (FII) such as merchant bankers,
mutual funds and pension funds were now allowed to invest in India.

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Q.8 What are the types of taxes?

Ans. There are two types of taxes: Direct and Indirect taxes.
Q.9 Differentiate between direct and indirect taxes.
Ans. The differences between direct and indirect taxes are tabulated below:

Direct taxes Indirect taxes

It is imposed on individuals and It is imposed on Goods and Services
companies
The burden of tax cannot be shifted The burden of tax can be shifted
Generally progressive in nature Generally proportional in nature
Do not reach all sections of the economy Reaches all sections of the economy
Examples: Income tax Examples: GST
Property tax
Corporate tax, etc.

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Q.10 Explain tax reforms.

Ans. Tax reforms refers to reforms in government’s taxation and expenditure policies,
which are collectively known as “Fiscal Policies”
There are two types of taxes: Direct and Indirect taxes (see previous section for
details)
The major tax reforms are:
i. Reduction in Taxes: Since 1991, there have been a continuous reduction in
income and corporate tax as high tax rates were an important reason for tax
evasion. But moderate rates of income tax encourage saving and voluntary
disclosure of income.
ii. Reforms in indirect taxes: Continuous reforms have been made in indirect taxes
to facilitate establishment of common national market for goods and services.
iii. Simplification of process: The tax structure has been simplified and moderated in
order to encourage the tax payer follow the rules.

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Q.10 Explain Foreign Exchange reforms.

Ans. The important reforms made in the Indian Foreign Exchange Market are: The
major tax reforms are:
i. Devaluation of Rupee: Devaluation refers to reduction of the value of domestic
currency by the government. To overcome balance of payment crisis, the rupee
was devaluated against foreign currencies. This led to an increase in the inflow of
Foreign Exchange
ii. Market determination of exchange rate: The government allowed rupee value to
be free from its control. As a result, market forces of demand and supply
determined the exchange value of the Indian rupee in terms of foreign currencies.

Q.11 Explain Trade and Investment Policy Reforms.

Ans. Before 1991, a lot of restrictions like high tariffs and quotas were imposed on
imports to protect the domestic industries. As a result, this protection reduced the
efficiency and competitiveness of the domestic industries and led to their slow growth.
So the reforms in Trade and Investment Policy were initiated as follows:

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i. Removal of quantitative restrictions on imports and exports: Under the New

Economic Policy, quantitative restrictions on imports and exports were greatly
reduced. For example, quantitative restrictions on imports of manufactures
consumer goods and agricultural products were fully removed from April, 2001

ii. Removal of Export Duties: Export duties were removed to increase the
competitive position of Indian goods in the international markets.

iii. Reduction in Import Duties: Import duties were reduced to improve the position of
domestic goods in the foreign market.

iv. Relaxation in Import Licensing System: The import licensing system was
abolished, except in case of hazardous and environmentally sensitive industries.
This encouraged domestic industries to import raw material at a better price. As a
result, it increased efficiency and competitiveness.

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PRIVATISATION
Q.12 Define Privatisation and explain the process by which it was achieved.
Ans. Privatisation means transfer of ownership, management and control of public
sector enterprises to the entrepreneurs in the private sector.
Privatisation can be done in two ways:
a. Transfer of ownership and management of public sector companies from the
government to private sector.
b. Disinvestment.
Q.13 Write a short note on Disinvestment.
Ans. When the government sells the share capital of PSUs to the private investors,
the process is called Disinvestment.
Disinvestment is a policy instrument to promote privatization.
It is taken as a remedial measure to improve production and managerial efficiency
as well as to facilitate modernization.
It is another means to manage fiscal deficit by the government.
Q.14 Explain the need for Privatisation.

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Ans. The following were the issues which required the need for Privatisation:
i. Poor performance of PSUs
ii. Structural transformation of Indian Economy from (low yielding) Agricultural
Economy to (high yielding) Industrial Economy
iii. Stop losses of the PSUs which proved to be social dead weight or social liability
iv. Prevent corruption and improve efficiency
v. Providing more functional freedom
vi. Enhancing competitive strength
Q.14 Write a short note on Navratnas, Maharatnas and Miniratnas.
Ans. In order to encourage PSUs to improve efficiency and profitability, the
government introduced the concept of “Navratnas”. Initially, the nine industries which
were accorded the status of “Navratnas” were the ones whose names appear in the
following image. However in 2009, many PSUs demonstrated exemplary shift in the
concept of industrialization in the economy and were promoted to the “Maharatna”
status. Recently, yet another status called “Miniratna” has been created to
acknowledge the performance of more PSUs and to motivate other PSUs also to
show better performance.
As on October 2019, there were 10 Maharatnas (see subsequent slides), 14
Navratnas and 74 Miniratnas.
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List of Initial 9 Navratnas

•Bharat Heavy Electricals Limited (BHEL)

•Indian Oil Limited (IOL)

•Steel Authority of India Limited (SAIL)

•Hindustan Petroleum Corporation Limited (HPCL)

•Videsh Sanchar Nigam Limited (VSNL)

•Bharat Petroleum Corporation Limited (BPCL)

•National Thermal Projects Corporation (NTPC)

•Indian Petrochemicals Corporation Limited (IPCL)

•Oil and Natural Gas Corporation (ONGC)

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GLOBALISATION
Q.15 Define Globalisation and explain the process by which it was achieved.
Ans. Globalisation means integrating the National Economy with the World Economy
through removal of barriers on International Trade and Capital Movements.
Q.16 Explain the changes made by Globalisation in the Indian Economy.
Ans. The following were the major changes brought about by Globalization:
1. Increase in the equity limit of Foreign Investment: Equity limit of Foreign Capital
Investment has been raised from the initial 40%. It now ranges between 51 to 100
percent.
47 high priority industries, foreign direct investment to the extent of 100% has
been allowed without any restrictions and red tape-ism.
Export trading houses had also been allowed foreign capital investment up to
100%. However, Foreign Exchange Management Act (FEMA) has been enforced
to manage foreign investments.
2. Partial Convertibility: Partial convertibility refers to the sale and purchase of
foreign currency for foreign transactions at the market price. To achieve the
objective of globalization, partial convertibility of Indian Rupee had been allowed
for the following transactions:
a. Import and export of Goods and Services
b. Payment of interest and dividend on investment
c. Remittances to meet family expenses. It is called partial convertibility
because it does not cover capital transactions.
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3. Long-term Trade Policy: Under this policy, all restrictions and controls on Foreign
Trade were removed. Open competition was encouraged, except some specific
goods, most goods are traded free of restrictions. That is why, it was called Liberal
Policy.
4. Reduction in Tariffs: In order to encourage competitiveness, tariff barriers were
withdrawn on most goods traded between India and the rest of the world.
5. Withdrawal of Quantitative Restrictions: Since 2001, the quantitative restrictions on
all import items were totally withdrawn. This is in line with India’s commitment to
the World Trade Organization (WTO).
Q.17 Explain the positive and negative results of Globalisation.
Ans. The positive and negative results of Globalisation are tabulated below:

POSITIVE RESULTS NEGATIVE RESULTS

1. Greater access to global markets 1. Benefitted more to developed countries
for expanding their market
2. Access to more advanced technology 2. Welfare and identity of lesser privileged
and knowhow persons in developing countries were
compromised
3. Provided better future prospects for 3. Resulted in economic disparities among
large industries in developing countries nations and people

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Q.18 Write a short note on “Out-sourcing”

Ans. Outsourcing refers contracting some of the activities to a third party which were
earlier performed by the organization.
Some of the services out-sourced to India include:
(i) Voice-based business processes ( known as BPO or Call-Centers)
(ii) Record keeping
(iii) Accountancy
(iv) Banking services
(v) Film editing
(vi) Music recording
(vii) Book transcriptions
(viii)Clinical advice
Some important aspects of out-sourcing are:
 Outsourcing is one of the important outcomes of globalization
 Because of the growth of fast modes of communication, particularly in the IT
industry, outsourcing has become more popular
 Out-sourcing refers to a system of hiring business services from outside the
organization
 India is emerging as an important destination of outsourcing not just on account of
the growth in IT industry, but also because of availability of cheap labour.
Q.19 Write a short note on World Trade Organization.
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Ans. World Trade Organization (WTO) was established as the successor organization
of GATT (General Agreement on Trade and Tariff) in 1995 with the following aspects:
 The WTO agreements cover trade in goods as well as services to facilitate
international trade
 Currently, there are 164 member countries and all are covered under its rules
 India has been in the forefront of framing fair global rules, regulations and
advocating the interests of the developing world.
 By removing quantitative restrictions on imports and reducing tariff rates, India has
kept is commitments made to the WTO, apart from taking reasonable steps in
liberalizing international trade
 Some major functions of WTO are:
i. To facilitate international trade through removal of tariff as well as non-tariff
barriers.
ii. To establish a rule-based trading regime, in which nations cannot place
arbitrary restrictions on trade
iii. To enlarge production and trade of services.
iv. To ensure optimum utilisation of world resources
v. To protect the environment
Q.20 Define Tariff and non-Tariff barriers.
Ans. Tariff barriers are those which are imposed on imports to make them relatively
costly and to m protect the domestic production
Non-tariff barriers are those which are imposed on the amount of imports and
exports.
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Q.21 Discuss the impact of WTO on Indian Economy.

Ans. The pointwise impact of WTO on Indian Economy is described below:
i. WTO is expected to offer greater export opportunities to the Indian Economy.
ii. Quota restrictions for textile and garment industry are removed under WTO. This
has helped India to increase its exports in these areas.
iii. India’ exports of agricultural goods are expected to rise on account of removal of
trade barriers under WTO.
iv. A sharp decline in “dumping” goods by the developed nations is expected as a
result of stability of the trading system through WTO. (“Dumping” refers to a
strategic “bulk-sale” of goods in the markets of developing nations at competitive
rates. It discourages domestic investment and therefore the growth of domestic
industries of developing countries.)
v. The WTO agreements is not uniformly distributed to capital market and labour
market. While free movement of capital is encouraged across different nations,
movement of free labour is not. Developing countries like India therefore, are
unable to take full benefits under WTO agreements as the low-wage rates in
labour cannot be offered to the high-wage areas of developed nations freely under
WTO agreements.
Q.22 What is bilateral and Multi-lateral trade?
Ans. The trade between any two countries is known as Bi-lateral Trade.
The trade between more than two countries is known as Multi-lateral Trade

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Q.23 Explain four merits of LPG along with its advantages.

Ans. Following are considered to be the merits of LPG (Liberalisation, Privatisation &
Globalisation) policies and their effect on Indian Economy:
i. Increase in rate of economic growth: The growth in GDP was 5.6% during the
period 1980 to 1991. During 1918-19, growth in GDP is estimated at 6.1% as
compared to growth rate of 6.7% in 2017-18. During the reform period, the growth
of Agriculture has declined, whereas industrial sector had some fluctuations but
the growth of service sector had gone up.
ii. Rise in Foreign Exchange Reserves: The opening of the economy led to the
rapid rise in Foreign Direct Investment (FDI). The figure of total foreign
investment, which was just US $ 0.1 billion in 1990-91 shot up to US $73.5 billion
in 2014 (735 times). This in turn induced better technological methods in
production and made the economy more competitive. Now a variety of goods are
available in Indian markets at competitive prices, e.g. cars, refrigerators, air-
conditioners &c.
iii. Check on Fiscal Deficit: A fiscal deficit is a shortfall in a government's income
compared with its spending. The government that has a fiscal deficit is spending
beyond its means. Fiscal deficit is often calculated as a percentage of gross
domestic product (GDP). The fiscal deficit fell to about 3.5% of GDP from 8.5%
prior to implementation of the reforms.
iv. Check on Inflation: Increase in production, tax and other reforms helped in
controlling the inflation. It was as high as about 17% in 1990-91 to around 3.5% in
2018-19.
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Q.24 Explain four demerits of LPG along with its disadvantages to Indian Economy.
Ans. LPG (Liberalisation, Privatisation & Globalisation) policies have been criticized on
the following lines considering their adverse effect on Indian Economy:
i. Neglect of Agriculture: The new economic policy laid less emphasis on
Agricultural sector as compared to industry, trade and services sector. It affected in
the following areas:
a. Reduction in Public investments: Public investments in irrigation and
agriculture related activities got reduced.
b. Shift towards cash crops: Also, due to export-oriented policy, production
shifted from food grains to cash crops leading to rise in prices of food grains.
c. Liberalisation and Reduction in import duties: A number of policy changes
such as:
1. Reduction of import duties on agriculture products
2. Removal of Minimum Support Price
3. Lifting of quantitative restrictions on Agricultural product
As a result, farmers had to face increased international competition. Most
farmers could not take up this challenge.
ii. Lopsided growth process: Although the Indian economy grew, the growth was
limited to certain specific sectors like the Information Technology, Tele-
communications, finance, hospitality, entertainment and travel. Apart from the
Agriculture sector, the manufacturing and the large-scale industries also did not
see much growth.
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iii. Rural-urban divide: LPG policies resulted in the concentration of growth process
mainly in the cities. Due to the lack of infrastructure facilities in most villages, rural
development did not keep pace with that of the urban development. Rural-urban
gulf (or gap) implies economic dualism which is a big threat to overall growth and
development. All MNCs focused only on urban areas due to conducive
infrastructure.
iv. Ineffective disinvestment and tax policies: The PSEs were sold at an under-
valued price to the private sector and the revenue from these sales were not
utilized to improve the social infrastructure. Also, reduction in taxes brought in less
revenue to the government, while the tax incentives to foreign investors also
further reduced the tax collection.
Q.25 Write a short note on Demonetization.
Ans. On November 8th, 2016 the government of India took a bold and important
decision of withdrawing high-value currency notes of ₹500/- and ₹1,000/- as legal
tenders. The government came out with new ₹500/- and ₹2,000/- notes after
demonetisation. Later, new notes of ₹10/-, ₹50/-, ₹100/- and ₹200/- were also
introduced. The following were the reasons presented by the government for this step
of demonetisation:
a. Reduce black money
b. Encourage cashless and more transparent online transactions
c. Avoid circulation of fake currency notes in the economy
d. Check terror-funding from neighbouring countries
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The Indian government had taken the step of demonetisation earlier twice: once in
1946 during the British rule and again in 1978.
The currency notes of ₹1,000/- and ₹10,000/- were removed from circulation in 1946.
However, both these notes were re-introduced with an additional ₹5,000/- currency
note in the year 1954.
In the second round of demonetisation in 1978, the currency notes of ₹1,000/-,
₹5,000/- and ₹10,000/- were removed from circulation with the sole aim of stopping
black money circulation in the country.
Q.26 Define Demonetization and explain its features.
Ans. Demonetization is the act of removing a currency unit of its status as legal tender.
Its features include:
a. Viewed as a tax administration measure – people holding black money had to
declare their unaccounted wealth and pay taxes at penal rates.
b. Tax evasion is discouraged
c. Aims to create a cashless or cash-lite economy. It encourages the savings by the
people.
d. Made the economy more transparent through digital transactions.
Q. 27 Write a short note on GST.
Ans. GST has been identified as one of the m most important tax reforms post-
independence. The government of India implemented GST as “One Nation One Tax”.
GST as an indirect tax replaced 17 other indirect taxes like VAT, Sales Tax, Excise
Duty, Service Tax, etc. in India. It came into effect on 1st July, 2017.
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Types of GST: The various types of are shown in the figure below:

Goods and Services Tax

Central GST: State GST: Integrated GST:

Levied by the Centre Levied by the Levied by the Centre
on INTRA state State/UT on on INTER state supply
supply of goods and INTRA state of goods and services
services supply of goods (it is the sum of CGST & SGST)
and services
There are currently four tax slabs under GST: namely 5%, 12%, 18% and 28%.
A GST council comprising of the following members advises the government on GST
related issues from time to time:
Chairperson: Finance Minister
Vice-Chairperson: chosen amongst the ministers of state governments
Members: MoS (Finance) and ministers of Finance/ Taxation of each State/ UT
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